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Rand on Real Estate: The Institutionalization of the U.S. Housing Market

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By Greg Rand

Over the past year it has been reported that several private equity companies, hedge funds and private REITS have turned their attention to the single family home market. This is the first time capital sources like this have taken such a keen interest in our marketplace, and it presents great opportunity as well as great challenge.

On the opportunity side, the top 5 funds eyeing our space have already raised over $3 billion and have an appetite for much more. In fact, estimates from sources in that industry say that the total appetite will be in the neighborhood of 10 million homes over the next decade. How can that be? Look at the numbers:

  • There are 150 million households in the U.S.
  • 65 percent are homeowners. Roughly 50 million (35 percent) households are renters.
  • Half of them rent single family homes.
  • That’s 25 million rental homes in this current environment.
  • Institutional investors intend to acquire 10 million.

The good news is clear. The one thing a soft real estate market needs to completely recover and revive is more demand on a large scale. Billions in completely new demand will provide that upward pressure on prices and drive us into a full blown recovery. More good news is the creation of rental stock for all the families being displaced by foreclosure and short sale. These families need a place to land and investors will provide it.

There are risks. Our market performs wonderfully when there is a one-seller/one-buyer balance. It’s when institutions have gotten involved in the past when things have gone haywire. The current housing crisis is the best example. When institutions tampered with lending standards, they artificially boosted buying power for millions of buyers and it drive prices up to an unnatural level. The resulting correction was the market’s response. We have to be cautious, which means it is important that professionals with experience in the housing market play a role in shaping the strategies of these new institutional investors. This is definitely not a time for us to be passengers on our own train.

Until recently, the majority of institutions had very similar business plans – buy portfolios of houses in bulk from Fannie, Freddie and the banks. It makes sense. Get a discount on foreclosures and buy the way they are most comfortable – from another institution.

But that strategy is failing. Government interference in the foreclosure process has caused the large mortgage servicers to turn to short sales instead of REOs as the best solution to a non performing mortgage. The portfolios are not available to be bought in bulk, so now the big investors must enter the open marketplace to buy homes one at a time. Many large investors are also lowering their expectations to a more realistic level.

No longer are they bent on buying at a deep discount. Many are now more interested in sound fundamentals and good cash flow. Properties that fit that description are hiding right in plain sight all over the country. Maybe in your market. They are looking for our help in building quality portfolios all over the US.

But how do they do that when our industry does not speak their language? How can they evaluate properties as assets when there are no standards of how to measure and report CAP rates and cash-on-cash returns? How can they utilize the massive force of the real estate brokerage industry when the industry is not prepared to meet them half way?

The opportunity is now for brokerages to get their agents trained and equipped to service this new and massive wave of business. There is a solution to the housing recession at hand – billions of new dollars from buyers who were never in the market before. Amazingly, the only thing holding it back is a lack is our readiness.

Greg Rand is the CEO of OwnAmerica. For more information, email greg@ownamerica.com. Or visit www.ownamerica.com.

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